FT Alphaville is still confused by eurozone bigwigs’ promise that they’ll follow “IMF principles” to be friendly to bondholders in sovereign debt bailouts. Versus, say, being nasty about making them write down debt.
The promise got the IMF wrong. It also ignored what’s still going on in Greece’s “involvement” of the private sector. Which isn’t very friendly at the moment. More like “catastrophic”.
So, here’s an excellent point from Gabriel Sterne of Exotix, in a note on Tuesday which was trying to find whatever value might be left in Greek bonds, now that they’re trading close to or even (on the bid side) below 20 cents in the euro. (We’ll get to that exercise presently.) Sterne reminds his readers that the IMF itself got its “traditional” role in PSI wrong when it became involved in Greece in 2010:
The IMF has performed a hugely valuable role in many economic crises, but in Greece it made, in our opinion, a key policy error. The Fund should have put the brakes on the EU politicians’ blinkered focus on Greek fiscal adjustment by insisting that it be accompanied by an early debt restructuring. According to its Exceptional Access Criteria (EAC), the Fund should have had no alternative if it wished to lend to Greece. The EAC guidelines state that lending should only go ahead if “a rigorous and systematic analysis indicates that there is a high probability that the member’s public debt is sustainable in the medium term.” There are times when it is not clear what debt stock is sustainable and what is not. In our opinion, since May 2010, Greece’s debt has been much too large to fall into that grey area. To lend into an unsustainable debt position means throwing good money after bad; and given that the Fund is senior to existing creditors, these may need to suffer a bigger haircut as a result of the IMF intervention. We noted in May 2010 that we were surprised there was not a stronger commitment to PSI [private sector involvement] in the first bailout, learning the lessons from Argentina…
Sterne is talking here about one of the most maddening things of all with the eurozone invoking the IMF on debt restructuring. It’s the point we’ve highlighted in red. It’s not just that the Fund is quite able to advise PSI, if its analysis of a sovereign’s debt sustainability leaves it unable to justify lending (something which the eurozone seems to have forgotten with its “promise” to bondholders). The Fund would advise PSI early on in a bailout.
It’s really the delay in the Greek PSI that seems increasingly urgent now — more than who gets to run it, or implant this or that lowered coupon or discount rate in the restructured bonds.
It’s still about this little thing called good faith. Good faith is going to be easier when everyone isn’t heartily sick of being in the same negotiating room as each other for months on end. It’s also easier when the creditors aren’t offered one fairly light write-down one month, only to be told to accept a much bigger alternative weeks later (because the debt needed a bigger write-down all along), and also when creditors aren’t fighting each other over getting paid first.
This is about where we are with Greek PSI.
Which is really just the pathological procrastination problem we’ve talked about all along. This has been in the background of the eurozone crisis in recent weeks, but the price of that pathological procrastination is simply getting worse and worse… (chart via Exotix)
… And so are the means to bringing the procrastination to an end. The official creditors might not really want to cover Greece’s €14.4bn bond redemption in March 2012, so that suggests a deadline for getting PSI completed… though if holdout investors park themselves in sufficient numbers in the March 2012 bond, it looks more likely Greece has to legislate a “retro-active” collective action clause to smoke them out with semi-coercion, etc.
And that’s the arrangement the eurozone wants you to forget, by treating the Greek restructuring as a “one-off”. The one-off that ate the eurozone.